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Will Regulations Sink EU-U.S. Free Trade?

Trade negotiations are not what they used to be. The advent of ‘twenty-first century’ or ‘comprehensive’ trade agreements, whose scope reaches far beyond the traditional topics of tariff reductions and market access, have opened up discussions in a number of areas that used to be the exclusive realm of domestic policy. One area in which trade agreements have expanded is in addressing so-called ‘beyond the border’ issues such as regulatory trade barriers. In the Transatlantic Trade and Investment Partnership (TTIP) talks, the trade effects of domestic regulation have been emphasized as an area of great potential economic growth, with large figures being thrown around—some citing a 2.5 to 3 percent increase in GDP from the total elimination of regulatory trade barriers. But this early enthusiasm for resolving these long-standing barriers to trade masks a fundamental problem that is emerging: The United States and the European Union are at odds over the nature of regulatory trade barriers and how to address them.

For the United States, the focus seems to be on applying its domestic regulatory reform efforts on a global basis. On his latest trip to Europe, U.S. Trade Representative Michael Froman extolled the virtues of the U.S. approach to regulating, and urged the EU to take into account the principles of “transparency,” “participation,” and “accountability.” He noted that the U.S. process promotes these principles by providing: “advance notice of specific regulatory measures” (transparency); “meaningful opportunities for input from a broad range of stakeholders” (participation); and “responses to that input” (accountability).

“The United States and the European Union are at odds over the nature of regulatory trade barriers and how to address them.”

His emphasis on these features reflects U.S. criticism of the EU regulatory process, in particular the EU’s system of issuing general papers for comment prior to proposing actual rules, without allowing comments on the text of the regulation itself. The clear implication of Froman’s remarks, made in Brussels before an audience of trade officials, is that, from the U.S. perspective, the EU should reform its regulatory process to take these principles into account.

The EU, by contrast, does not see domestic regulatory reform as the central issue in the elimination of transatlantic regulatory trade barriers. Furthermore, the EU does not view national discrepancies in the rulemaking process as a problem for cooperation more generally, and has also argued that the EU system is, in fact, transparent. They, too, get public and private input, but at an earlier stage, and allow for the participation of a wide range of stakeholders during the rulemaking process.

Not surprisingly, the EU did not seem receptive to the call for change. European Trade Commissioner Karel De Gucht put it as follows: “Neither side will be successful if it seeks to impose its system on the other.” In a speech crafted in response to Froman’s comments, De Gucht made clear that the EU focus is on addressing the outcome of regulation, by trying to reconcile regulatory differences that exist across various markets. This approach includes finding “ways to cooperate on future regulations to avoid unnecessary trade barriers,” and “to make existing regulations more compatible.” For example, automobile regulators in the U.S. and the EU each impose their own safety rules. Rather than forcing car companies to establish separate production processes for their vehicles in order to meet the diverse requirements of each market, governments could simply recognize that the rules are functionally equivalent, and a car that satisfies one market’s rules should be deemed acceptable in others as well. Thus, the EU has suggested focusing on key sectors of transatlantic trade, such as autos, pharmaceuticals, and chemicals, among others, to examine where regulatory divergences are especially costly and prevent the free exchange of goods that have already gone through extensive testing and certification processes to evaluate their safety.

Based on this recent expression of views from high-level officials, it seems that the United States and European Union characterize the problem of regulatory trade barriers very differently. The U.S. sees regulatory barriers as having to do with how regulations are created; the EU, on the other hand, accepts differences in process at the outset, and is more concerned with addressing technical discrepancies in regulatory outcomes.

With these different approaches to regulatory trade barriers, U.S. and EU negotiators do not appear to be on the same page. Does this mean that the whole enterprise is doomed to failure? If so, that would be a disaster for TTIP, as many have been pointing to the elimination of regulatory trade barriers as the core of the negotiations.

To avoid such a spectacular failure, we need to think about a realistic way forward. Both issues are worth discussing at the international level. However, they have different implications in terms of their impact and sensitivities. The EU focus on tackling existing and future regulatory divergences, as opposed to domestic regulatory reform, is a useful starting point for addressing this issue. It can lead to concrete economic gains, and, if done right, should not interfere with domestic policy objectives.

And there is already precedent for it. Such avenues for cooperation exist in the form of various mutual recognition agreements for specific products, and more permanently in fora such as the U.S.-Canada Regulatory Cooperation Council. What is needed for the U.S. and EU is a similar mechanism where regulators can sit down with their counterparts and talk about ways to overcome arbitrary differences in current regulations, and how to avoid such differences in future regulations. Eventually, such a forum could evolve to include other countries as well.

By contrast, the goal of using binding international agreements to improve the domestic regulatory process more generally is asking a lot, and it is uncertain whether this would yield any major benefit in reducing the burden of regulation. Domestic regulatory systems are the result of complex internal processes, and cannot easily be changed. The EU regulatory system is not some accident of history. They have spent a lot of time developing it, and it would not be easy to get internal agreement on modifications. The EU Commission has already been working on improving the regulatory environment for over a decade, most recently through the Regulatory Fitness and Performance Programme (REFIT). The U.S. has had similar initiatives, and continues to pursue domestic reforms.

This is not to say that nothing can be done about regulatory process reforms at the international level. But regulatory models are a delicate topic in domestic political terms, and should be approached with some sensitivity. Thus, rather than binding international rules, an international forum for discussion of these issues may be a useful way forward. Many governments around the world have put a great deal of thought into these issues. Everyone could probably learn a bit from their counterparts, by sharing experiences with other countries undertaking similar efforts.

The TTIP is a promising new trade initiative, and its efforts to deal with regulatory trade barriers are admirable. But it is important to keep the talks focused on realistic goals. If we want this effort to succeed, it would be best to emphasize the smaller, but achievable, goal of dealing with regulatory divergence, and leave domestic regulatory reform efforts mostly to individual states and their citizens.